1. 14 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 Material Requirements Planning (MRP) and ERP

2. 14 - 2© 2011 Pearson Education, Inc. publishing as Prentice Hall Outline  Dependent Demand  Dependent Inventory Model Requirements  Master Production Schedule  Bills of Material  Accurate Inventory Records  Purchase Orders Outstanding  Lead Times for Components

3. 14 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall Outline – Continued  MRP Structure  MRP Management  Lot-Sizing Techniques  Lot-for-Lot (LFL),  Economic Order Quantity (EOQ),  Periodic Order Quantity (POQ)

4. 14 - 4© 2011 Pearson Education, Inc. publishing as Prentice Hall Outline – Continued  Extensions of MRP  Material Requirements Planning II (MRP II)  Closed-Loop MRP  Capacity Planning  Enterprise Resource Planning (ERP)  MRP In Services,  Resource Planning (DRP)

5. 14 - 5© 2011 Pearson Education, Inc. publishing as Prentice Hall Learning Objectives When you complete this chapter you should be able to: 1.Develop a product structure 2.Build a gross requirements plan 3.Build a net requirements plan 4.Determine lot sizes for lot-for-lot (LFL), Economic Order Quantity (EOQ), and Periodic Order Quantity (POQ) 5.Know recent extensions to MRP

6. 14 - 6© 2011 Pearson Education, Inc. publishing as Prentice Hall Wheeled Coach  Largest manufacturer of ambulances in the world  International competitor  12 major ambulance designs  18,000 different inventory items  6,000 manufactured parts  12,000 purchased parts

7. 14 - 7© 2011 Pearson Education, Inc. publishing as Prentice Hall Dependent Demand  The demand for one item is related to the demand for another item  Given a quantity for the end item, the demand for all parts and components can be calculated

8. 14 - 8 Trumpet and Subassemblies

9. 14 - 9 Bill-of-Material for Trumpet

10. 14 - 10© 2011 Pearson Education, Inc. publishing as Prentice Hall Benefits of MRP 1.Better response to customer orders 2.Faster response to market changes 3.Improved utilization of facilities and labor 4.Reduced inventory levels

11. 14 - 11© 2011 Pearson Education, Inc. publishing as Prentice Hall Figure 14.1 Change production plan? Master production schedule Management Return on investment Capital Engineering Design completion Aggregate production plan Procurement Supplier performance Human resources Manpower planning Production Capacity Inventory Marketing Customer demand Finance Cash flow The Planning Process

12. 14 - 12© 2011 Pearson Education, Inc. publishing as Prentice Hall The Planning Process Figure 14.1 Is capacity plan being met? Is execution meeting the plan? Change master production schedule? Change capacity? Change requirements? No Execute material plans Execute capacity plans Yes Realistic? Capacity requirements plan Material requirements plan Master production schedule

13. 14 - 13 MRP  MRP is a dependent demand technique that uses  Bill-of-Material (BOM)  On-hand inventory data  Expected receipts (outstanding purchase orders)  Master Production Schedule (MPS)  Lead Time information to determine material requirements.

14. 14 - 14© 2011 Pearson Education, Inc. publishing as Prentice Hall MRP Structure Figure 14.5 Output Reports MRP by period report MRP by date report Planned order report Purchase advice Exception reports Order early or late or not needed Order quantity too small or too large Data Files Purchasing data BOM Lead times (Item master file) Inventory data Master production schedule Material requirement planning programs (computer and software)

15. 14 - 15© 2011 Pearson Education, Inc. publishing as Prentice Hall Master Production Schedule (MPS)  Specifies what is to be made and when  Must be in accordance with the aggregate production plan  Uses inputs from financial plans, customer demand, engineering, suppliers  As the process moves from planning to execution, each step must be tested for feasibility  The MPS is the result of the production planning process

16. 14 - 16© 2011 Pearson Education, Inc. publishing as Prentice Hall Master Production Schedule (MPS)  MPS is established in terms of specific products  Schedule must be followed for a reasonable length of time  The MPS is quite often fixed or frozen in the near term part of the plan  The MPS is a rolling schedule  The MPS is a statement of what is to be produced, not a forecast of demand

17. 14 - 17 Master Production Schedule (MPS)  Time-phased plan specifying how many and when the firm plans to build each end item Aggregate Plan (Product Groups) Aggregate Plan (Product Groups) MPS (Specific End Items)

18. 14 - 18 MPS Example – 1 One possible MPS…

19. 14 - 19© 2011 Pearson Education, Inc. publishing as Prentice Hall MPS Example – 2 MonthsJanuaryFebruary Aggregate Production Plan1,5001,200 (Shows the total quantity of amplifiers) Weeks12345678 Master Production Schedule (Shows the specific type and quantity of amplifier to be produced 240-watt amplifier100100100100 150-watt amplifier500500450450 75-watt amplifier300100 Figure 14.2

20. 14 - 20© 2011 Pearson Education, Inc. publishing as Prentice Hall MPS Example 3 Gross Requirements for Crabmeat Quiche Gross Requirements for Spinach Quiche Day67891011121314and so on Amount50100476011075 Day78910111213141516and so on Amount1002001506075100 Table 14.1 For Nancy’s Specialty Foods

21. 14 - 21© 2011 Pearson Education, Inc. publishing as Prentice Hall Bills of Material  List of components, ingredients, and materials needed to make product  Provides product structure  Items above given level are called parents  Items below given level are called children

22. 14 - 22© 2011 Pearson Education, Inc. publishing as Prentice Hall BOM Example B (2) Std. 12” Speaker kit C (3) Std. 12” Speaker kit w/ amp-booster 1 E (2) F (2) Packing box and installation kit of wire, bolts, and screws Std. 12” Speaker booster assembly 2 D (2) 12” Speaker D (2) 12” Speaker G (1) Amp-booster 3 Product structure for “Awesome” (A) A Level 0

23. 14 - 23© 2011 Pearson Education, Inc. publishing as Prentice Hall BOM Example B (2) Std. 12” Speaker kit C (3) Std. 12” Speaker kit w/ amp-booster 1 E (2) F (2) Packing box and installation kit of wire, bolts, and screws Std. 12” Speaker booster assembly 2 D (2) 12” Speaker D (2) 12” Speaker G (1) Amp-booster 3 Product structure for “Awesome” (A) A Level 0 Part B:2 x number of As =(2)(50) =100 Part C:3 x number of As =(3)(50) =150 Part D:2 x number of Bs + 2 x number of Fs =(2)(100) + (2)(300) =800 Part E:2 x number of Bs + 2 x number of Cs =(2)(100) + (2)(150) =500 Part F:2 x number of Cs =(2)(150) =300 Part G:1 x number of Fs =(1)(300) =300

24. 14 - 24© 2011 Pearson Education, Inc. publishing as Prentice Hall Accurate Records for Outstanding Purchase Orders  Accurate inventory records are absolutely required for MRP (or any dependent demand system) to operate correctly  Generally MRP systems require more than 99% accuracy  Outstanding purchase orders must accurately reflect quantities and scheduled receipts

25. 14 - 25© 2011 Pearson Education, Inc. publishing as Prentice Hall Lead Times  The time required to purchase, produce, or assemble an item  For production – the sum of the order, wait, move, setup, store, and run times  For purchased items – the time between the recognition of a need and the availability of the item for production

26. 14 - 26© 2011 Pearson Education, Inc. publishing as Prentice Hall Time-Phased Product Structure ||||||||12345678||||||||12345678 Time in weeks F 2 weeks 3 weeks 1 week A 2 weeks 1 week D E 2 weeks D G 1 week Start production of D Must have D and E completed here so production can begin on B Figure 14.4 1 week 2 weeks to produce B C E

27. 14 - 27© 2011 Pearson Education, Inc. publishing as Prentice Hall Determining Gross Requirements  Starts with a production schedule for the end item – 50 units of Item A in week 8  Using the lead time for the item, determine the week in which the order should be released – a 1 week lead time means the order for 50 units should be released in week 7  This step is often called “lead time offset” or “time phasing”

28. 14 - 28© 2011 Pearson Education, Inc. publishing as Prentice Hall Determining Gross Requirements  From the BOM, every Item A requires 2 Item Bs – 100 Item Bs are required in week 7 to satisfy the order release for Item A  The lead time for the Item B is 2 weeks – release an order for 100 units of Item B in week 5  The timing and quantity for component requirements are determined by the order release of the parent(s)

29. 14 - 29© 2011 Pearson Education, Inc. publishing as Prentice Hall Determining Gross Requirements  The process continues through the entire BOM one level at a time – often called “explosion”  By processing the BOM by level, items with multiple parents are only processed once, saving time and resources and reducing confusion  Low-level coding ensures that each item appears at only one level in the BOM

30. 14 - 30© 2011 Pearson Education, Inc. publishing as Prentice Hall Gross Requirements Plan Table 14.3 Week 12345678Lead Time A.Required date50 Order release date501 week B.Required date100 Order release date1002 weeks C.Required date150 Order release date1501 week E.Required date 200300 Order release date2003002 weeks F.Required date300 Order release date3003 weeks D.Required date 600200 Order release date6002001 week G.Required date 300 Order release date3002 weeks

31. 14 - 31© 2011 Pearson Education, Inc. publishing as Prentice Hall Net Requirements Plan

32. 14 - 32© 2011 Pearson Education, Inc. publishing as Prentice Hall Net Requirements Plan

33. 14 - 33© 2011 Pearson Education, Inc. publishing as Prentice Hall Determining Net Requirements  Starts with a production schedule for the end item – 50 units of Item A in week 8  Because there are 10 Item As on hand, only 40 are actually required – (net requirement) = (gross requirement - on- hand inventory)  The planned order receipt for Item A in week 8 is 40 units – 40 = 50 - 10

34. 14 - 34© 2011 Pearson Education, Inc. publishing as Prentice Hall Determining Net Requirements  Following the lead time offset procedure, the planned order release for Item A is now 40 units in week 7  The gross requirement for Item B is now 80 units in week 7  There are 15 units of Item B on hand, so the net requirement is 65 units in week 7  A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5

35. 14 - 35© 2011 Pearson Education, Inc. publishing as Prentice Hall Determining Net Requirements  A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5  The on-hand inventory record for Item B is updated to reflect the use of the 15 items in inventory and shows no on-hand inventory in week 8  This is referred to as the Gross-to-Net calculation and is the third basic function of the MRP process

36. 14 - 36© 2011 Pearson Education, Inc. publishing as Prentice Hall S BC 1213891011 203040 Lead time = 6 for S Master schedule for S Gross Requirements Schedule Figure 14.6 123 10 Master schedule for B sold directly Periods Therefore, these are the gross requirements for B Gross requirements: B 10405020 40+1015+30 =50=45 12345678 Periods A B C Lead time = 4 for A Master schedule for A 567891011 401550

37. 14 - 37© 2011 Pearson Education, Inc. publishing as Prentice Hall Net Requirements Plan The logic of net requirements Available inventory Net requirements On hand Scheduled receipts +–= Total requirements Gross requirements Allocations +

38. 14 - 38 Allocations  Allocated items refer to the number of units in inventory that have ben assigned to specific future production but not yet used or issued from the stock room.  The following slide illustrates how allocated items increase gross requirements

39. 14 - 39© 2011 Pearson Education, Inc. publishing as Prentice Hall MRP Planning Sheet Figure 14.7

40. 14 - 40© 2011 Pearson Education, Inc. publishing as Prentice Hall Safety Stock  BOMs, inventory records, purchase and production quantities may not be perfect  Consideration of safety stock may be prudent  Should be minimized and ultimately eliminated because of its domino effect  Typically built into projected on-hand inventory

41. 14 - 41© 2011 Pearson Education, Inc. publishing as Prentice Hall MRP Management  Works best in product-focused, repetitive environments  MRP is a dynamic system  Facilitates replanning when changes occur  Regenerating  Net change  Too many changes lead to ystem nervousness

42. 14 - 42© 2011 Pearson Education, Inc. publishing as Prentice Hall Finite Capacity Scheduling  MRP systems do not consider capacity during normal planning cycles  Finite capacity scheduling (FCS) recognizes actual capacity limits  By merging MRP and FCS, a finite schedule is created with feasible capacities which facilitate rapid material movement

43. 14 - 43© 2011 Pearson Education, Inc. publishing as Prentice Hall Lot-Sizing Techniques  Lot-for-lot techniques order just what is required for production based on net requirements  May not always be feasible  If setup costs are high, lot-for-lot can be expensive  Economic order quantity (EOQ)  EOQ expects a known constant demand and MRP systems often deal with unknown and variable demand

44. 14 - 44© 2011 Pearson Education, Inc. publishing as Prentice Hall Lot-Sizing Techniques  Periodic Order Quantity (POQ) looks at future orders to determine most economic lot size  The Wagner-Whitin algorithm is a complex dynamic programming technique  Assumes a finite time horizon  Effective, but computationally burdensome

45. 14 - 45© 2011 Pearson Education, Inc. publishing as Prentice Hall Lot-for-Lot Example 12345678910 Gross requirements 35304001040300 55 Scheduled receipts Projected on hand 350000000000 Net requirements 0304001040300 55 Planned order receipts 3040104030 55 Planned order releases 3040104030 55 Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

46. 14 - 46© 2011 Pearson Education, Inc. publishing as Prentice Hall Lot-for-Lot Example 12345678910 Gross requirements 35304001040300 55 Scheduled receipts Projected on hand 35 000000000 Net requirements 0304001040300 55 Planned order receipts 3040104030 55 Planned order releases 3040104030 55 Holding cost = $1/week; Setup cost = $100; Lead time = 1 week No on-hand inventory is carried through the system Total holding cost = $0 There are seven setups for this item in this plan Total ordering cost = 7 x $100 = $700

47. 14 - 47© 2011 Pearson Education, Inc. publishing as Prentice Hall EOQ Lot Size Example 12345678910 Gross requirements 35304001040300 55 Scheduled receipts Projected on hand 35004333662669 39 Net requirements 030007040016 Planned order receipts 73 Planned order releases 73 Holding cost = $1/week; Setup cost = $100; Lead time = 1 week Average weekly gross requirements = 27; EOQ = 73 units

48. 14 - 48 Calculating EQO © 2011 Pearson Education, Inc. publishing as Prentice Hall  Annual demand (D): (270/10)*52=1404  Setup Cost (S)= $100  Holding Cost (H) = $1*52= $52  EOQ= 73 units

49. 14 - 49© 2011 Pearson Education, Inc. publishing as Prentice Hall EOQ Lot Size Example 12345678910 Gross requirements 35304001040300 55 Scheduled receipts Projected on hand 35004333662669 39 Net requirements 030007040016 Planned order receipts 73 Planned order releases 73 Holding cost = $1/week; Setup cost = $100; Lead time = 1 week Average weekly gross requirements = 27; EOQ = 73 units

50. 14 - 50 EOQ Lot Size Example  Total cost = setup cost + holding cost  Total cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks)=$3,798  Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) = $730 OR Total Cost=4*100+375(including 57 units for week 11)=$775 © 2011 Pearson Education, Inc. publishing as Prentice Hall

51. 14 - 51 Lot-Sizing Techniques ▶ Periodic order quantity (POQ) orders quantity needed for a predetermined time period ▶ Interval = EOQ / average demand per period ▶ Order quantity is set to cover the interval ▶ Order quantity is calculated when order is released

52. 14 - 52 POQ Lot Size Example WEEK12345678910 Gross requirements 35304001040300 55 Scheduled receipts Projected on hand 3500400070300055 Net requirements 030001000550 Planned order receipts 70800850 Planned order releases 708085 EOQ = 73 units; Average weekly gross requirements = 27; POQ interval = 73/27 ≅ 3 weeks

53. 14 - 53 POQ Lot Size Example  Setups = 3 x $100 = $300  Holding cost = (40 + 70 + 30 + 55) units x $1 = $195  Total cost = $300 + $195 = $495 © 2011 Pearson Education, Inc. publishing as Prentice Hall

54. 14 - 54© 2011 Pearson Education, Inc. publishing as Prentice Hall Lot-Sizing Summary For these three examples Lot-for-lot$700 EOQ$730 POQ$495 Wagner-Whitin would have yielded a plan with a total cost of $455

55. 14 - 55 MRP Evolution MRP Closed Loop MRP MRP II ERP Schedule Materials Incorporate Feedback Schedule & Purchase Materials Coordinate w/ Mfg Resources

56. 14 - 56 Closed-Loop MRP Production Planning Master Production Scheduling Material Requirements Planning Capacity Requirements Planning Realistic? No Feedback Execute: Capacity Plans Material Plans Yes Feedback

57. 14 - 57  Goal: Plan and monitor all resources of a manufacturing firm (closed loop):  manufacturing  marketing  finance  engineering  Simulate the manufacturing system Manufacturing Resource Planning (MRP II)

58. 14 - 58  A computer system that integrates application programs in accounting, sales, manufacturing, and other functions in the firm  This integration is accomplished through a common database shared by all the application programs  Produces information in real time and ties in customers and suppliers Enterprise Resource Planning (ERP)

59. 14 - 59 Typical ERP System

60. 14 - 60© 2011 Pearson Education, Inc. publishing as Prentice Hall Enterprise Resource Planning (ERP)  ERP modules include  Basic MRP  Finance  Human resources  Supply chain management (SCM)  Customer relationship management (CRM)

61. 14 - 61 Major ERP Providers FirmHQ 2004 Share of $23.6B Market SAPGermany 40% OracleUS 22% Sage GroupUK 7% MicrosoftUS 3% InforUS Source: AMR Research

62. 14 - 62© 2011 Pearson Education, Inc. publishing as Prentice Hall Advantages of ERP Systems 1.Provides integration of the supply chain, production, and administration 2.Creates commonality of databases 3.Improves information quality 4.May provide a strategic advantage

63. 14 - 63© 2011 Pearson Education, Inc. publishing as Prentice Hall ERP Drawbacks 1.Very expensive to purchase and even more so to customize 2.Implementation may require major changes- Resistance to change 3.So complex that many companies cannot adjust to it 4.Involves an ongoing, possibly never completed, process for implementation 5.Training is an on-going activity

64. 14 - 64© 2011 Pearson Education, Inc. publishing as Prentice Hall ERP in the Service Sector  ERP systems have been developed for health care, government, retail stores, hotels, and financial services  Also called efficient consumer response (ECR) systems  Objective is to tie sales to buying, inventory, logistics, and production

65. 14 - 65© 2011 Pearson Education, Inc. publishing as Prentice Hall Distribution Resource Planning (DRP) Using dependent demand techniques through the supply chain  Expected demand or sales forecasts become gross requirements  Minimum levels of inventory to meet customer service levels  Accurate lead times  Definition of the distribution structure